Taxes on Income

12 Months Ended

Dec. 31, 2018

Taxes on Income and Uncertain Tax Positions [Abstract]

Note 9 – Taxes on Income

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as U.S. Tax Reform. U.S. Tax Reform included multiple changes to the U.S. tax code with varying effects on the Company’s 2017 results, including, but not limited to, (i) a revaluation of the Company’s U.S. deferred tax assets and liabilities based upon the reduction of the U.S. federal statutory corporate income tax rate from 35% to 21% and (ii) implementation of a new system of taxation for non-U.S. earnings which eliminates U.S. federal income taxes on dividends from certain foreign subsidiaries and imposes a one-time transition tax on the deemed repatriation of undistributed earnings of certain foreign subsidiaries that is payable over eight years. U.S. Tax Reform also made changes to the U.S. tax code that have impacted 2018 and will impact future years, including, but not limited to, (i) reduction of the U.S. federal statutory corporate tax rate; (ii) elimination of the corporate alternative minimum tax; (iii) the creation of the base erosion anti-abuse tax, a new minimum tax; (iv) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (v) a new provision designed to tax global intangible low-taxed income (“GILTI”), which allows for the possibility of using foreign tax credits and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (vi) a new limitation on deductible interest expense; (vii) the repeal of the U.S. production activity deduction; (viii) limitations on the deductibility of certain executive compensation; (ix) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; (x) a reduction in the dividends received deduction from 70% to 50% (in the case of less-than-20%-owned subsidiaries) and from 80% to 65% (in the case of less-than-80%-owned subsidiaries); and (xi) limitations on net operating losses generated after December 31, 2017 to 80 percent of taxable income.

Also, in 2017, the Securities and Exchange Commission issued guidance on accounting for the tax effects of U.S. Tax Reform and provided a one-year measurement period for companies to complete the accounting. The Company’s initial analysis of the impact of U.S. Tax Reform resulted in an incremental tax expense of $22.2 million recorded during the fourth quarter of 2017. U.S. Tax Reform reduced the U.S. federal statutory corporate tax rate from 35% to 21% effective January 1, 2018. Consequently, the Company recorded a decrease in U.S. net deferred tax assets of approximately $4.5 million with a corresponding net adjustment to deferred income tax expense during the fourth quarter of 2017. This initial estimate was not adjusted during 2018. The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of certain of the Company’s foreign subsidiaries as of either the November 2, 2017 or December 31, 2017 measurement date provided within U.S. Tax Reform. The Company made a reasonable estimate of its Transition Tax and recorded a gross provisional Transition Tax obligation during the fourth quarter of 2017 of $18.4 million, or $17.8 million, net of the impact of eliminating U.S. Federal income taxes on dividends from certain foreign subsidiaries received during 2017.

Subsequent to numerous temporary regulations, notices, and other formal guidance published by the Internal Revenue Service (“IRS”), U.S. Treasury, and various state taxing authorities in 2018, the Company completed its accounting for the tax effects of U.S. Tax Reform as of December 22, 2018 and refined the total incremental tax expense related to U.S. Tax Reform to approximately $28.0 million. Based on proposed regulations published by the U.S. federal and state taxing authorities, the Company recorded a $2.5 million tax benefit to adjust its net Transition Tax to $15.3 million. The Company elected to pay its Transition Tax in installments over eight years as provided for in U.S. Tax Reform. In addition, the Company recorded deferred income tax expense of $0.3 million in 2018 related to the deductibility of certain executive compensation based on formal guidance issued by the IRS in 2018. As a result of the impacts from U.S. Tax Reform, the Company re-evaluated its global cash strategy resulting in a change to its indefinite reinvestment assertion attributable to a portion of its undistributed foreign earnings and recognized a deferred tax liability and corresponding deferred tax expense of $7.9 million, which primarily represents the Company’s estimate of the non-U.S. income taxes the Company will incur to ultimately remit those earnings to the U.S. The Company’s reinvestment assertions are further explained below.

Taxes on income before equity in net income of associated companies for the years ended December 31, 2018, 2017 and 2016 are as follows:

			2018		2017		2016
Current:
	Federal	$	6,583	$	21,265	$	4,680
	State		(1,844)		2,529		518
	Foreign		12,114		14,105		12,540
			16,853		37,899		17,738
Deferred:
	Federal		7,859		6,889		4,601
	State		(173)		(36)		104
	Foreign		511		(3,099)		783
Total		$	25,050	$	41,653	$	23,226

The components of earnings before income taxes for the years ended December 31, 2018, 2017 and 2016 are as follows:

		2018		2017		2016
U.S.	$	27,387	$	10,468	$	31,175
Foreign		55,711		50,200		52,834
Total	$	83,098	$	60,668	$	84,009

Total deferred tax assets and liabilities are composed of the following as of December 31, 2018 and 2017:

		2018		2017
Retirement benefits	$	3,532	$	5,472
Allowance for doubtful accounts		1,160		1,134
Insurance and litigation reserves		396		497
Postretirement benefits		896		1,056
Supplemental retirement benefits		2,862		2,679
Performance incentives		4,347		3,779
Equity-based compensation		753		1,071
Insurance settlement		4,374		4,581
Operating loss carryforward		8,434		8,602
Foreign tax credit and other credits		1,929		3,043
Uncertain tax positions		(400)		(410)
Other		2,645		2,816
		30,928		34,320
Valuation allowance		(7,520)		(7,401)
Total deferred tax assets, net	$	23,408	$	26,919
Depreciation		4,049		4,444
Foreign pension and other		1,062		1,295
Amortization and other		13,497		15,373
Unremitted Earnings		7,857		—
Total deferred tax liabilities	$	26,465	$	21,112

The following are the changes in the Company’s deferred tax asset valuation allowance for the years ended December 31, 2018, 2017 and 2016:

								Effect of
		Balance at		Additional		Allowance		Exchange		Balance
		Beginning		Valuation		Utilization		Rate		at End
		of Period		Allowance		and Other		Changes		of Period
Valuation Allowance
Year ended December 31, 2018	$	7,401	$	650	$	(471)	$	(60)	$	7,520
Year ended December 31, 2017	$	6,344	$	1,127	$	(61)	$	(9)	$	7,401
Year ended December 31, 2016	$	6,259	$	294	$	(187)	$	(22)	$	6,344

The Company’s net deferred tax assets and liabilities are classified in the Consolidated Balance Sheets as of December 31, 2018 and 2017 as follows:

	2018		2017
Non-current deferred tax assets	$	6,946	$	15,460
Non-current deferred tax liabilities		10,003		9,653
Net deferred tax (liability) asset	$	(3,057)	$	5,807

The following is a reconciliation of income taxes at the Federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2018, 2017 and 2016:

		2018		2017		2016
Income tax provision at the Federal statutory tax rate	$	17,458	$	21,229	$	29,403
Unremitted Earnings		7,857		—		—
Transition Tax		(3,118)		18,388		—
Revaluation of U.S. deferred tax assets and liabilities		—		4,470		—
Global intangible low taxed income		1,211		—		—
Foreign derived intangible income		(1,034)		—		—
Non-deductible acquisition expenses		1,019		4,779		696
Share-based compensation		259		(1,419)		—
Differences in tax rates on foreign earnings and remittances		1,081		(2,663)		(2,862)
Foreign dividends		—		—		2,939
Excess foreign tax credit utilization		—		(2,761)		(5,493)
Research and development activities credit utilization		(230)		(235)		(238)
Uncertain tax positions		(79)		(651)		(833)
U.S. domestic production activities deduction		—		(1,155)		(875)
State income tax provisions, net		196		569		357
Non-deductible entertainment and business meals expense		415		248		238
Miscellaneous items, net		15		854		(106)
Taxes on income before equity in net income of associated companies	$	25,050	$	41,653	$	23,226

As of December 31, 2018, the Company had a net deferred tax liability of $2.0 million in the U.S. In addition, the Company has foreign tax loss carryforwards of $6.6 million of which none will expire through 2023, and $0.6 million expires thereafter. The remaining foreign tax losses have no expiration dates. A partial valuation allowance has been established with respect to the tax benefit of these losses for $0.4 million.

Pursuant to U.S. Tax Reform, specifically the Transition Tax, the Company has recorded a charge for U.S. income taxes on its undistributed earnings of non-U.S. subsidiaries; however, the Company could be subject to other taxes, such as withholding taxes and dividend distribution taxes if these undistributed earnings are ultimately remitted to the U.S. As a result of the impacts from U.S. Tax reform, the Company re-evaluated its global cash strategy, resulting in a change to its indefinite reinvestment assertion attributable to a portion of its undistributed foreign earnings, and recognized a deferred tax liability and corresponding deferred tax expense of $7.9 million as of December 31, 2018, which primarily represents the Company’s estimate of the non-U.S. taxes the Company will incur to ultimately remit these earnings to the U.S. It is the Company’s current intention to reinvest its additional undistributed earnings of non-U.S. subsidiaries to support working capital needs and certain other growth initiatives. The amount of such undistributed earnings at December 31, 2018 was approximately $210.0 million. Any tax liability which might result from ultimate remittance of these earnings is expected to be substantially offset by foreign tax credits (subject to certain limitations). It is currently impractical to estimate any such incremental tax expense.

As of December 31, 2018, the Company’s cumulative liability for gross unrecognized tax benefits was $7.1 million. The Company had accrued approximately $0.8 million for cumulative penalties and $0.6 million for cumulative interest as of December 31, 2018. As of December 31, 2017, the Company’s cumulative liability for gross unrecognized tax benefits was $6.8 million. The Company had accrued approximately $1.0 million for cumulative penalties and $0.6 million for cumulative interest as of December 31, 2017.

The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of tax expense on income before equity in net income of associated companies in its Consolidated Statements of Income. The Company recognized a credit of $0.2 million for penalties and an expense of $0.1 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2018, a credit of $0.7 million for penalties and a credit of $0.2 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2017, and a credit of $0.2 million for penalties and a credit of $0.7 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2016.

The Company estimates that during the year ending December 31, 2019, it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $0.9 million due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, 2019. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016, respectively, is as follows:

			2018		2017		2016
Unrecognized tax benefits as of January 1		$	6,761	$	6,240	$	11,032
	Decrease in unrecognized tax benefits taken in prior periods		(183)		(308)		(869)
	Increase in unrecognized tax benefits taken in current period		2,023		2,347		1,921
	Decrease in unrecognized tax benefits due to lapse of statute of limitations		(1,292)		(2,116)		(5,744)
	(Decrease) increase due to foreign exchange rates		(259)		598		(100)
Unrecognized tax benefits as of December 31		$	7,050	$	6,761	$	6,240

The amount of unrecognized tax benefits above that, if recognized, would impact the Company’s tax expense and effective tax rate is $2.2 million, $2.2 million and $1.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Brazil from 2000, Italy from 2007, the Netherlands from 2012, the United Kingdom and Mexico from 2013, Spain and China from 2014, India from fiscal year beginning April 1, 2016 and ending March 31, 2017, the U.S. from 2015, and various U.S. state tax jurisdictions from 2009.

As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia S.r.l., relating to the tax years 2007 through 2013. The Company has filed for competent authority relief from these assessments under the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except 2007. During the second quarter of 2018, the Italian tax authorities assessed additional tax due from Quaker Italia, S.r.l., relating to the tax years 2014 and 2015. The Company met with the Italian tax authorities in the fourth quarter of 2018 to discuss these assessments and no resolution was agreed upon, so the Company filed an appeal with the first level of tax court in Italy. If the appeal is not successful in materially reducing the assessed tax, then the Company will further evaluate its options including potentially filing for competent authority relief from these assessments under MAP, consistent with the Company’s previous filings for 2008 through 2013. As of December 31, 2018, the Company believes it has adequate reserves for uncertain tax positions with respect to these and all other audits.